Inside the Microsoft-Yahoo Deal, and the Future of the Search Competition with Google

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Microsoft and Yahoo officially announced this morning that they had reached a search engine and advertising agreement. Amid intense speculation, and after more than a year of disagreements over minor and not-so-minor details, the two companies have signed a ten-year agreement that puts Redmond, WA-based Microsoft (NASDAQ: MSFT) in control of both companies’ search engine technology, and Yahoo (NASDAQ: YHOO) in charge of the sale and distribution of advertising for both its own search engine and Microsoft’s Bing search engine.

As part of the announcement, Microsoft and Yahoo launched a website dedicated to explaining and promoting the agreement. “It establishes the foundation for a new era of Internet innovation and development,” Yahoo CEO Carol Bartz said in the press release attached to the website. Microsoft now owns an exclusive license to the Sunnyvale, CA-based company’s search technology, including the right to integrate it into its own search platforms, a process that will cost hundreds of millions of dollars, according to Microsoft CEO Steve Ballmer in a conference call with reporters and financial analysts this morning.

Even before that integration, the Bing search algorithm developed by Microsoft will be used on the search engine sites of both companies. According to Ballmer, expanding Bing onto Yahoo will give the fledgling search engine, just a few months old, the room to compete more effectively, both in terms of users and advertising dollars. The press release does not mention Google, the colossus of Internet search, by name, instead referring to it as “one company that dominates more than 70 percent of all search.” But it’s hard to imagine Microsoft and Yahoo would have reached an accord without Google overwhelmingly outcompeting them. At the moment though, Google employees are not allowed to comment on the deal.

On the other end of the deal, advertisers wanting to use either company’s search engine will have to go through Yahoo, although this only applies to so-called premium advertisers. Yahoo will use Microsoft’s AdCenter program to run this business, and AdCenter will still be the program for self-serve advertising. Although Yahoo is in control, both companies will still have their own … Next Page »